Case of Authority for Advance Rulings, March 31, 2009 (case Worley Parsons Services Pty. Ltd. Vs Director of Income Tax (International Taxation-II))
| President | P.V. Reddi, J. (Chairman), A. Sinha and Rao Ranvijay Singh, Members |
| Resolution Date | March 31, 2009 |
Judgment:
P.V. Reddi, J. (Chairman), (At New Delhi)
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The applicant is a company incorporated in Australia engaged in the business of providing professional services to the energy and resource industries. Reliance Petroleum Ltd. - an Indian Company proposed to lay cross-country pipelines for transportation of hydro-carbons from Jamnagar to Bhopal and from Goa to Hyderabad. In connection therewith, the applicant was awarded contract for providing various services viz. (i) engineering and procurement services, (ii) project management services, (iii) construction advisory and commissioning advisory services. Three agreements were entered into between the applicant and Reliance during the year 2001. However, all the activities contemplated to be performed under these agreements were not carried out as the contract was terminated in the mid-way i.e. in March 2003. As far as the third agreement is concerned (construction and commissioning advisory), no services were at all performed. The Phase-I of first agreement was executed fully and only a portion of the work under the second agreement was done by the date of termination. The first agreement under which the applicant received a substantial amount is the agreement entered into on 13th August, 2001 (effective from 14th May, 2001) styled as "Engineering and Procurement Services Agreement". Even in respect of this agreement, phase-II thereof which relates to 'detailed engineering' and balance procurement items' was either not taken up or very little work was done. The applicant states that the activities concerning basic engineering services were primarily carried out in Perth, Australia. According to the applicant, the services done in Perth account for 80% of the scope of work detailed in the agreement. The procurement functions relating to phase-I were 'essentially' performed in India, according to the applicant.
1.1. Under the Agreement, namely, "Engineering and Procurement Services Agreement", the applicant has to perform the services defined in the scope of services in Appendix I. The services broadly are engineering and procurement services. Engineering services cover basic engineering and detailed engineering. "Basic Engineering Package" has been defined to mean the basic design specifications and documents in sufficient detail to enable the detailed engineering to be commenced and completed, as more particularly described in Appendix I. Section (B) of Appendix I spells out the "Scope of work and Services". It is divided into two phases. The scope of work of phase-I covers (1) studies (techno-economic system, optimization study, hydraulic study etc.) (2) pipeline route studies (3) support during statutory approval process (typical drawings, design basis and methodologies which will help in obtaining various statutory clearances), (4) process engineering which include data sheets, line lists etc. for the complete system (5) specifications required for procurement of long lead items which include specifications for installations, testing and pre-commissioning works of pipeline, pump stations and delivery stations, (6) design basis manual of all engineering disciplines (7) Front End Engineering Design including preliminary drawings of all disciplines and bill of quantities necessary for procurement of long lead items (8) drawings including typical plans of pump stations, delivery stations etc. (9) construction planning i.e. constructability evaluation of pipeline route selected by Reliance, contracting philosophy etc. (10) all services related to procurement including technical and commercial evaluation for long lead procurement items upto ordering stage, (11) all services related to contracts including technical and commercial evaluation for construction bid packages for pipeline pump stations and delivery stations upto ordering stage. The list of long lead procurement items in phase-I is given in item (12).
1.2. The scope of work under phase-II inter alia comprises of 'detailed engineering' and services related to procurement of 'balance items'. The former services include finalization of all reports prepared in phase-I to incorporate detailed engineering and vendor-data related updates, approval for construction drawings of all disciplines of engineering including pipelines. As noted already, phase-II has not been carried out. It is seen from para 5 of Appendix I that the primary responsibility for basic engineering, detailed engineering and procurement/contract services is that of the applicant and Reliance played supportive role. Para 3 stipulates that provision should be made for 7 Reliance project Team members to be stationed at contractor's head office during phase-I and at consultant's Indian office during phase-II. It is noted in para D(1) of ArticleIII that between the zero day (21st May 2001) and the date of execution of the agreement, the parties have begun discussions and analysed with respect to the overall basic engineering of the project including design criteria and other information necessary to provide the process basis for the project and the contractor (applicant) shall prepare and submit all detailed schedules, plans etc. to enable Reliance to approve the basic parameters of engineering and procurement aspects of the project.
1.3. The overall schedule and milestones are prescribed in Article v. Inter alia it is stated therein that the basic engineering and ordering of long lead items for phase-I shall be completed before 20th October 2001.
1.4. The price and price basis is set out in ArticleVII. The lump sum price is stated to be 7,980,118.00 Aus Dollars. The break-up of this amount is given as follows:
(A) Jamnagar to Bhopal pipeline- lump sum fixed price for phase-I - basic engineering and procurement services of long lead items from Perth* - 2,229,794.00 Aus Dollars.
(B) Goa to Hyderabad pipeline - same as above 1,232,994 Aus Dollars.
Art. VII also stipulates that the cost of travel to and from India, the cost of accommodation and cost of providing office and communication facilities at site shall be borne directly by Reliance in accordance with project procedures set out in Appendix v. The payment terms are set out in Article VIII.
1.5. Though not specifically stated in the application, it is seen from the written submissions as well as the Summary of income furnished by the applicant (vide Paper Book III), that some work relating to project management services (Phase I) was also carried out in India. In fact, it was stated so in the course of arguments. In the affidavit of Mr. Richard Brooke Smith annexed to the written submissions, it is stated that no work was carried out in respect of phase-II of the Agreement pertaining to Engineering and Procurement services and the Project Management Services. As regards the detailed engineering services, they form part of phase-II of the first Agreement as seen from Appendix 1 & 2 to the Agreement and in regard to them, there is some ambiguity in the application. There is a mention of the fact that "assistance" in detailed engineering was provided from India. Excepting this vague phraseology there is nothing else to show that a portion of detailed engineering services was performed in terms of the first Agreement.
1.6. The applicant then submits that its employees were present in India for 127 days during the financial year 2001-02 and 241 days during the next year. A chart giving the details of the names of the employees and the duration of their stay in India has been furnished. The alleged discrepancy pointed out by the Revenue between the details furnished in the application and the affidavit of Mr. R.Brooke Smith was clarified in the rejoinder statement. It is seen from the chart that the first arrival of the applicant's employee in India was in October 2001 and he stayed for 75 days. Then, in November 2001, 4 employees stayed in India for duration of 8 days. The applicant stated that no services were rendered during the financial year 2003-04 by reason of closure of the contracts. The applicant clarified in its written submissions that Mr. Mark Vaughan acted as the project manager and that he and his team members were provided with office space in the office of the local engineering contractor of Reliance, namely, Jacobs Engineering Ltd. at Jacobs House, Andheri East, Mumbai. However, the nature of work/ or services done by the applicant's employees who stayed in Mumbai has not been indicated specifically anywhere.
1.7. Procurement Services contemplated by the Ist Phase of the Agreement relate to long lead items and the services relating to procurement of balance items pertain to phase-II. As already noted, it is the case of the applicant that Phase-I work has been completely performed. Procurement services are listed out in Appendix-1. The establishment of detailed procurement plan by the applicant in consultation with the Reliance project team is the first task mentioned therein. Then follows the preparation of detailed procurement cycle for all major items, preparation of bidder list specific to the equipment/material, preparation of Master Purchase document, floating enquiry documents to approved global venders, receiving tenders or bids, opening technical and unpriced bids and tabulating bids status, commercial evaluation of such bids, arranging technical clarification meetings with the suppliers if required, short listing acceptable suppliers and arranging meetings with them participating in commercial negotiations and preparing final summary documents after negotiation, preparing MRP document incorporating all technical parameters of selected suppliers, issuance of purchase orders and expediting the delivery of equipment as per the P.O. delivery schedule. Coordination with Engineering Department and third party inspection agency for stage-wise final inspection at vendor's work, reviewing test results/inspection release note, checking packing list of shipment...
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